Southwestern Energy to lay off 600 in Arkansas, 1,100 overall (Updated)

Southwestern Energy Co. said Thursday (Jan. 21) it is laying off around 1,100 workers companywide with 600 of those jobs to cut in Arkansas. The Texas driller’s Fayetteville Shale operations in Arkansas had more than 1,500 workers a year ago.

“Natural gas prices have continued to decline over the past year, creating conditions where cash flow to fund projects will be significantly lower than it has been the past few years,” said company spokeswoman Christina Fowler. “This has led to a need to reduce the company’s overall workforce.”

She continued: “These organizational changes are required to maintain competitiveness in this low gas price environment. We regret having to make this decision and we thank all of our employees who were affected by today’s announcement for their contributions to Southwestern Energy Company.”

She said the company is providing outplacement services, employee assistance, severance and other benefits to support impacted employees and their families through the transition.

Southwestern’s announcement follow its recent shake-up in the executive ranks on Jan. 6, when longtime company CEO Steve Mueller resigned and was replaced by industry veteran Bill Way. The Houston native takes over as chief executive as the entire oil and gas industry struggles to deal with declining oil and gas prices, which have fallen to historic lows over the past year.

That trend has caused Southwestern, one of the industry’s low-cost operations leaders, to mothball its entire drilling operations in the Arkansas shale play and transfer much of its capital and assets to the liquids rich Marcellus Shale play in Pennsylvania. Also, Southwestern is delaying its capital guidance until the end of this month, or early February. On Thursday, the company said its entire drilling program has been shut down.

According to a company 8K filing on Thursday, the early 2016 workforce reduction follows a smaller reduction that occurred during the third quarter of 2015, which company officials said were immaterial to earnings.

“Together, these reductions are expected to decrease current costs of the Company by approximately $150 to $175 million on an annual basis, exclusive of the one-time termination benefits; a portion of these savings represent costs that would have been capitalized rather than expensed,” the company said. “The workforce reductions result primarily from anticipated lower drilling activity. At the start of 2016, the Company had no drilling rigs in operation but has not finalized its capital budget and operating plan for the year.”

Southwestern’s announcement comes after Wall Street credit rating service Fitch Ratings revised Southwestern Energy Company’s $4.7 billion in long-term debt from stable to “negative.”

“The negative outlook considers the effect that persistently low oil & gas prices will have on the forecasted leverage profile following the December 2014 leveraged acquisition of the Southwestern Appalachia assets,” Fitch said. “(Our) previous base case scenario assumed a more supportive pricing environment that helped to fund initial development spending of the earlier stage Southwestern Appalachia assets, resulting in production and cash flow growth over a three-year period.”

Fitch said since Southwestern’s capital available for development and production is expected to be curtailed, the oil and gas giant’s leverage profile may remain a ‘BBB-‘ credit over the rating horizon without supportive signals for a price recovery or credit-friendly transactions that reduce gross debt in the next 12-18 months.

Besides Southwestern Energy, the entire oil and gas sector is struggling to stay afloat as crude oil and natural gas prices search for a bottom. On Wednesday, U.S. benchmark crude, West Texas Intermediate, settle below $27 for the first time in 13 years. WTI for February delivery close down $1.91 or 6.7% at $26.55 in yesterday’s session on the New York Mercantile Exchange. Natural gas futures rose slightly by 1.3% or 2.7 cents at $2.118 per million British thermal units.

The layoffs by Southwestern are likely to be followed in the coming weeks by more bad news as the Houston-based oil and gas company reports its fourth quarter and yearly earnings in early February, along with expectations that the Texas driller’s exploration and production budget will be slashed.

In the Fayetteville Shale play, Southwestern invested $944 million in the Arkansas development in 2014. In 2015, that investment was down to only $560 million just months after the company completed its blockbuster multibillion dollar deal with Chesapeake and promoted Way to president of the company at the end of 2014.

OTHER CUTBACKS IN THE ENERGY SECTOR, ARKANSAS
The Southwestern news follows the move by BHP Billiton to recognize a pre-tax impairment charge of nearly $7.2 billion against the carrying value of its onshore U.S. oil and gas assets in the company’s upcoming financial results.

As part of the 2016 capital budget, which began July 1, BHP plans to spend $3.1 billion in the liquids-rich Eagle Ford Shale and Permian shale basins. Only $400 million and $200 million has been allocated respectively for the dry-gas Haynesville and Fayetteville shale plays, essentially shutting down those developments except for administrative and completion and wellhead production activities.

Australia-based BHP Billiton has said it is looking for an exit from its unprofitable foray into the Fayetteville Shale play as declining natural gas prices continue to cast a dark cloud over the company’s U.S. drilling operations.

By rig count, BHP plans to cut the total number of operating drilling pads in the U.S. from 26 to 16. That also means the Australian conglomerate is essentially pulling up stakes in Arkansas’ maturing natural gas play with its current rig count at “zero” and its operational budget sliding to $100 million, BHP’s financial reports show.

In late 2011, shortly after the Australia mining giant landed in Arkansas, BHP said it planned to quadruple production from its onshore U.S. shale operations, adding nearly 20 new rigs in the Fayetteville Shale region and increasing natural gas production four-fold by the end of the decade. At the time, BHP said its U.S. capital spending program would jump from $4.5 billion to $6.5 billion annually by 2020, with the lion’s share targeted toward its Arkansas development.

BHP’s leasehold position of 487,000 net acres makes it the second-largest Fayetteville Shale operator behind Southwestern Energy Corp. with an average operating stake of 58%. Those pricey assets were originally purchased from Chesapeake Energy Corp. in early 2011 with an average per well drilling and completion cost of $3.5 million.

SEVERANCE REVENUE SIGNALS
Collections of Arkansas’ severance tax have signaled a reduction in Fayetteville Shale Play activity.

Monthly and quarterly severance tax collections in December slumped to historic lows in Arkansas as natural gas rig crews across the state have been furloughed or packed up their drilling equipment for the foreseeable future.

For the second quarter of fiscal 2016, or the three-month period ended Dec. 31, severance tax revenue collected on marketed natural gas sales drooped to only $9.98 million, down 50.1% compared to $19.98 million in the same period in fiscal 2015.

At the same time, Arkansas began 2016 with zero rigs operating in Arkansas for the first time since July 2013, according to Baker Hughes weekly rig count. That follows Southwestern Energy Inc.’s surprise announcement in late December that the Texas driller was mothballing its two remaining natural gas rigs in the Arkansas shale play until spot prices turn around.

This is the second straight quarter in the fiscal year that began July 1, 2015, where severance tax collections for natural gas in Arkansas are down more than 50%, monthly tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration shows.